ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Introduction

The following discussion and analysis presents a review of our financial
condition as of December 31, 2013 and our results of operations for the years
ended December 31, 2013, 2012 and 2011. As used in this report, except as
otherwise indicated, references to the "Company," "Universal American," "we,"
"our," and "us" are to Universal American Corp., a Delaware corporation and its
subsidiaries.

You should read the following analysis of our consolidated results of
operations and financial condition in conjunction with the consolidated
financial statements and related consolidated footnotes included in this Annual
Report on Form 10-K. The following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions that could cause
our actual results to differ materially from management's expectations. Factors
that could cause such differences include those set forth under Part I,
Item 1A-Risk Factors.

Overview

Universal American, through our health insurance and managed care
subsidiaries, primarily serves the growing Medicare population by providing
Medicare Advantage products. Approximately 30% of the Medicare population in the
United States is currently enrolled in Medicare Advantage plans, a type of
Medicare health plan offered by private companies that contract with the federal
government to provide enrollees with health insurance. Our current focus is to
grow our Medicare Advantage business in our core markets, which largely consists
of our health plans offered in the Southwest and Upstate New York markets. In
addition, we believe there is an opportunity to address the high cost of health
care for the remaining 70% of the Medicare population enrolled in traditional
fee-for-service Medicare and have joined primarily with primary-care and
multi-specialty provider groups to form thirty-four Accountable Care
Organizations, or ACOs, pursuant to the Medicare Shared Saving Program, or
Shared Savings Program. We also provide Medicaid services to Medicaid agencies
through APS Healthcare and recently acquired the Total Care Medicaid health plan
serving approximately 35,000 members in Upstate New York.

We believe that attractive growth opportunities exist in providing products,
particularly health insurance, to the growing senior market. At present,
approximately 51 million Americans are eligible for Medicare, the Federal
program that offers basic hospital and medical insurance to people over 65 years
old and some disabled people under the age of 65. According to the U.S. Census
Bureau, more than 2 million Americans turn 65 in the United States each year,
and this number is expected to grow as the so-called baby boomers continue to
turn 65. In addition, many large employers that traditionally provided medical
and prescription drug coverage to their retirees have begun to curtail these
benefits. Medicare Advantage continues to grow its share of the overall Medicare
market and we believe is likely to continue to gain positive acceptance with
consumers.

Medicare Shared Savings-Accountable Care Organizations

In March 2010, President Obama signed into law The Patient Protection and
Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010,
which we collectively refer to as the Affordable Care Act. The Affordable Care
Act established ACOs as a tool to improve quality and lower costs through
increased care coordination in the Medicare Fee-for-Service, or FFS, program,
which covers approximately 70% of the Medicare recipients, approximately
36 million eligible Medicare beneficiaries. CMS established the Shared Savings
Program to facilitate coordination and cooperation among providers to improve
the quality of care for FFS beneficiaries and reduce unnecessary costs. Eligible
providers, hospitals, and suppliers may participate in the Shared Savings
Program by creating or participating in an ACO.

The Shared Savings Program is designed to improve beneficiary outcomes and
increase value of care by (1) promoting accountability for the care of Medicare
FFS beneficiaries; (2) requiring coordinated care for all services provided
under Medicare FFS; and (3) encouraging investment in infrastructure and
redesigned care processes. The Shared Savings Program will reward ACOs that
lower their health care costs while meeting performance standards on quality of
care and putting patients first. Under the final Shared Savings Program rules,
Medicare will continue to pay individual providers and suppliers for specific
items and services as it currently does under the FFS payment methodologies. The
Shared Savings Program rules require CMS to develop a benchmark for savings to
be achieved by each ACO if the ACO is to receive shared savings. An ACO that
meets the program's quality performance standards will be eligible to receive a
share of the savings to the extent its assigned beneficiary medical expenditures
are below the medical expenditure benchmark provided by CMS. A minimum savings
rate must be achieved before the ACO can receive a share of the savings. Once
the minimum savings rate is surpassed, all the savings below the benchmark
provided by CMS will be shared 50% with the ACOs. The minimum savings rate
varies depending on the number of patients assigned to the ACO, starting at 3.9%
for ACOs with patients totaling 5,000 and grading to 2% for ACOs with patients
totaling 10,000 or more.

CMS assigns a beneficiary to the preliminary roster of an ACO if the ACO
physicians billed for a "plurality" of services during the calendar year
preceding the performance period. A plurality means the ACO physicians provided
a greater proportion of primary care services, measured in terms of allowed
charges, than the physicians in any other ACO or Medicare-enrolled tax-
identification number. CMS sets the benchmark for each ACO using the historical
medical costs of the beneficiaries assigned to an ACO. At the end of the ACO
performance period, CMS applies the same plurality definition but to a different
time period, the actual performance period. CMS does not fully update the
benchmark to reflect the new mix of beneficiaries assigned during the
performance period. As a result, many beneficiaries originally assigned to an
ACO at the beginning of a performance year (i.e. January 1) may

Table of Contents

no longer be on the ACOs roster at the end of a performance year
(i.e. December 31) if they did not see a physician in the ACO during the
performance year. As a result, many ACOs may experience a significant attrition
of healthier patients in their ACO rosters that were included in the original
benchmark set by CMS but had not received care during the performance period
itself. This can have a significant adverse impact on an ACOs ability to achieve
shared savings. Accordingly, it will be important for ACOs to ensure that all
the assigned beneficiaries to an ACO continue to receive wellness and other
services during the year to ensure they are assigned to the ACO at the end of
the performance period.

As of December 31, 2013, we have partnered with primary-care provider groups
and a variety of other health care providers to form thirty-four ACOs which have
been approved by CMS for participation in the Shared Savings Program. Based on
data provided by CMS at December 31, 2013, these thirty-four ACOs included
approximately 3,200 participating providers with approximately 358,000 assigned
Medicare fee-for-service beneficiaries covering portions of thirteen states both
within and outside our current Medicare Advantage footprint, including Southeast
Texas and upstate New York. CHS provides these ACOs with care coordination,
analytics and reporting, technology and other administrative capabilities to
enable participating providers to deliver better care, improved health and lower
healthcare costs for their Medicare fee-for-service beneficiaries. During 2014,
we may reduce the number of our ACOs based on a variety of factors, including
the level of commitment by the physicians in the ACO and the likelihood of the
ACO achieving shared savings.

The Medicare Shared Savings Program is relatively new and therefore has
limited historical experience. This impacts our ability to accurately accumulate
and interpret the data available for calculating the ACOs' shared savings.
Therefore, we were not able to recognize revenue for the year ended December 31,
2013. We expect that any revenue for the initial program periods ending
December 31, 2013 will be reported in 2014. Based on the ACO operating
agreements, we bear nearly all of the costs of the ACO operations until revenue
is recognized. At that point, we share in 100% of the revenue up to our costs
incurred. Any remaining profit is generally shared equally with our ACO provider
partners.

Medicaid Program, Dual Eligibles and Health Benefits Exchanges

Established in 1965, Medicaid is the largest publicly funded program in the
United States, and provides health insurance to low-income families and
individuals with disabilities. Authorized by Title XIX of the Social Security
Act, Medicaid is an entitlement program funded jointly by the federal and state
governments and administered by the states. The majority of funding is provided
at the federal level. Each state establishes its own eligibility standards,
benefit packages, payment rates and program administration within federal
standards. Eligibility is based on a combination of household income and assets,
often determined by an income level relative to the federal poverty level.
Historically, children have represented the largest eligibility group. Our APS
Healthcare segment provides a variety of healthcare services to Medicaid
beneficiaries in numerous states.

Due to the Medicaid expansion provisions under the Affordable Care Act, CMS
projects that Medicaid expenditures will increase from approximately
$420 billion in 2012 to approximately $740 billion by 2020. In addition, as part
of the Affordable Care Act, approximately 15 million additional people are
expected to qualify for Medicaid in 2015.

A portion of Medicaid beneficiaries are dual eligibles, low-income seniors
and people with disabilities who are enrolled in both Medicaid and Medicare.
Based on CMS and Kaiser Family Foundation data, we estimate there are
approximately 10 million dual eligible enrollees with annual spending of
approximately $400 billion. Only a small portion of the total spending on dual
eligibles is

Table of Contents

administered by managed care organizations. Dual eligibles tend to consume more
healthcare services due to their tendency to have more chronic health issues.

Health Insurance Exchanges are a key component of the Affordable Care Act.
The Exchanges offer individuals and small businesses the opportunity to obtain
health insurance through private companies. Each State has the option of
operating its own Exchange, partnering with the federal government or defaulting
to a federally-run Exchange. Insurers are required to offer a minimum level of
benefits with three levels of coverage that vary based on premiums and
out-of-pocket costs. On January 1, 2014, we launched an Exchange product in
Upstate New York. As of March 1, 2014, we have less than 300 members in our
Exchange product.

Healthy Collaboration® Strategy

Our Healthy Collaboration® strategy sets out a model of improving the
quality of care to our members on a cost-efficient basis through an active
partnership with our providers. We believe we can improve medical outcomes
through a series of collaborative initiatives with our health care providers
including clinically sound benefit design (where applicable), medical
management, care coordination, population health management, long term
supportive services and integrated care management systems. Our goal is to
create mutually beneficial and interdependent collaborative arrangements with
our providers. We believe provider compensation arrangements should not only
help providers to be paid for complex care coordination, but also help align
their interests with our objective of improving clinical outcomes and
controlling unnecessary cost.

We provide medical management services, information and analysis, and other
support services to enable our health care partners to serve their patients
better. We rely heavily on the strong physician leadership of each network to
help us achieve the clinical goals that support the mission of the organization.

Healthcare Reform

In March 2010, President Obama signed into law the Affordable Care Act,
legislating broad-based changes to the U.S. health care system. Certain
provisions of the health reform legislation have already taken effect, and
others become effective at various dates over the next several years. Due to the
complexity of the health reform legislation, including yet to be promulgated
implementing regulations, lack of interpretive guidance, and gradual
implementation, the impact of the health reform legislation remains difficult to
predict and quantify. In addition, we believe that any impact from the health
reform legislation could potentially be mitigated by certain actions we may take
in the future including modifying future Medicare Advantage bids to compensate
for such changes. For example, the anticipation of additional revenues from STAR
bonuses or reduced CMS reimbursement rates are factored into the anticipated
level of benefits included in our Medicare Advantage bids for the upcoming year.

The provisions of these new laws include the following key points, which are
discussed further below:

º •
º limitation on the federal tax deductibility of compensation earned by
individuals, beginning in 2013; and

º •
º accountable care organizations, beginning in 2012.

Reduced Medicare Advantage reimbursement rates-Beginning in 2012, the
Medicare Advantage "benchmark" rates began the transition to target Medicare
fee-for-service cost benchmarks of 95%, 100%, 107.5% or 115% of the calculated
Medicare fee-for-service costs. The transition period is 2, 4 or 6 years
depending upon the applicable county. The counties are divided into quartiles
based on each county's fee-for-service Medicare costs. We estimate that
approximately 58% of our current membership resides in counties where the
Medicare Advantage benchmark rate will equal 95% of the calculated Medicare
fee-for-service costs, with approximately 95% of these members having a 6 year
transition period. Under the law, the premiums for such members commenced the
transition to 95% of Medicare fee-for-service costs beginning in 2012. This
followed the freezing of Medicare Advantage reimbursement rates in 2011 based on
our 2010 levels.

Medicare Advantage payment benchmarks have been cut over the last several
years, with additional funding reductions to be phased in as noted above. In
April 2013, CMS released its "Final Notice for Methodological Changes for
Calendar Year (CY) 2014 for Medicare Advantage (MA) Capitation Rates, and Part C
and Part D Payment Policies and 2014 Call Letter" (the "Final Notice") regarding
2014 Medicare Advantage benchmark rates and payment policies. The Final Notice
included significant reductions to 2014 Medicare Advantage payments, including
the benchmark reductions described above. These reductions and the Health Reform
legislation insurance industry fee described below result in revenue reductions
and incremental assessments totaling approximately 4.7% for 2014, against a
typical industry forward medical cost trend outlook of 3% and limit the ability
of plans to reduce benefits. As a result of these factors, we elected not to
rebid our Medicare Advantage rural private fee-for-service contract covering
approximately 10,700 beneficiaries in 2014. In addition, these factors will
likely affect our plan benefit designs, market participation, growth prospects
and earnings potential for our Medicare Advantage plans in the future. In
February 2014, CMS released its proposal for 2015 Medicare rates (the "45 Day
Call Letter") which is expected to reduce Medicare rates between 3%- 6%. These
expected rate reductions do not include the increase in the non-deductible
health insurance industry fee, known as the ACA fee. In addition, CMS has
proposed excluding the diagnosis codes obtained from in-home health risk
assessments for risk adjustment purposes, unless such codes are subsequently
validated by a subsequent clinical encounter with a qualified provider. CMS will
release its final action on 2015 rates in April 2014.

Implementation of quality bonus for STAR ratings-Beginning in 2012, Medicare
Advantage plans with an overall "STAR rating" of three or more stars (out of
five) based on 2011 performance are eligible for a "quality bonus" in their
basic premium rates. Plans receiving STAR bonus payments are required to use the
additional dollars to provide "extra benefits" for the plans' enrollees, to
comply with required minimum loss ratios, resulting in a competitive advantage
for those plans rather than a direct financial impact. The Affordable Care Act
limits these quality bonuses to the plans that achieve 4 or more stars as their
overall rating, but CMS is using demonstration authority to expand the quality
bonus to 3 STAR plans for a three year period that will end December 31, 2014.
In addition, beginning in 2012, Medicare Advantage STAR ratings affect the
rebate percentage available for plans to provide additional member benefits
(plans with quality ratings of 3.5 stars or above will have their rebate
percentage increased from a base rate of 50% to 65% or 70%). In all cases, this
rebate percentage is lower than the pre-Affordable Care Act rebate percentage of
75%. Our Medicare Advantage plans for 2014 are rated from 3.0 to 4.0 stars out
of 5.0, with approximately 75% of our core membership now in

Table of Contents

plans rated 4 stars, which ratings are considered when preparing our bids to be
submitted for 2015. A summary of these ratings is presented below:

º (1)
º Membership as of December 31, 2013. Excludes 13,200 members in areas
subject to 2014 Service Area Reductions. This includes 10,700 rural members
whose plans were not renewed for 2014.

Notwithstanding continued efforts to improve or maintain our STAR ratings
and other quality measures, there can be no assurances that we will be
successful in doing so. Accordingly, our plans may not be eligible for full
level quality bonuses or increased rebates, which could adversely affect the
benefits such plans can offer, reduce membership, and reduce profit margins.

In addition, CMS has indicated that plans with a STAR rating of less than
3.0 for three consecutive years may be subject to termination. While we do not
currently have any plans with a rating below 3.0, our inability to maintain STAR
ratings of 3.0 or better for a sustained period of time could ultimately result
in plan termination by CMS which could have a material adverse impact on our
business, cash flows and results of operations. Also, the CMS STAR
ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage
plans that enable those plans to offer improved benefits and/or better pricing.
Furthermore, lower quality scores compared to our competitors may result in us
losing potential new business in new markets or dissuading potential members
from choosing our plan in markets in which we compete. Lower quality scores
compared to our competitors could have a material adverse effect on our rate of
growth.

Stipulated minimum MLRs-Beginning in 2014, the new healthcare reform
legislation will stipulate a minimum medical loss ratio, or MLR, of 85% for
Medicare Advantage plans. This MLR takes into account benefit costs, quality
initiative expenses, the ACA fee and taxes. Financial and other penalties may
result from failing to achieve the minimum MLR ratio. Our reported Medicare
Advantage MLR was 83.4% for the year ended December 31, 2013 and 80.6% for the
year ended December 31, 2012. Although the methodology for defining medical
costs and for calculating MLRs was recently defined by CMS, it remains subject
to interpretation and we are continuing to evaluate its impact. Complying with
such minimum ratio by increasing our medical expenditures or refunding any
shortfalls to the federal government could have a material adverse effect on our
operating margins, results of operations, and our statutory required capital.

Non-deductible health insurance industry fee ("ACA Fee")-Beginning in 2014,
the new healthcare reform legislation will impose an annual aggregate health
insurance industry fee of $8.0 billion (with increasing annual amounts
thereafter) on health insurance premiums, including Medicare Advantage premiums,
that is not deductible for income tax purposes. As a result, our effective
income tax rate will increase in 2014 and future years. Our share of the new fee
will be based on our pro rata percentage of premiums written during the
preceding calendar year compared to the industry as a whole, calculated

Table of Contents

annually. This fee will first be expensed and paid in 2014 and will affect the
profitability of our Medicare Advantage business and could have a material
adverse effect on our results of operations. We have estimated that the fee to
be paid in 2014, based on 2013 net written premiums, will be approximately
$22 million. Pursuant to the guidance issued by the FASB in July 2011, for
reporting in accordance with U.S generally accepted accounting principles
(GAAP), the liability for the fee will be estimated and recorded in full once
the entity provides qualifying health insurance in the corresponding period with
a corresponding deferred cost that is to be amortized to expense on a
straight-line basis over the applicable calendar year. For statutory reporting
purposes, the fee will be expensed on January 1 in the year of payment, rather
than amortized to expense over the year. The ACA fee will be included in other
operating costs, however, will be factored in when calculating the stipulated
minimum MLR.

Coding intensity adjustments-Under the new healthcare reform legislation,
the coding intensity adjustment instituted in 2010 became permanent, resulting
in mandated minimum reductions in risk scores of 4.91% in 2014 increasing each
year to 5.91% in 2018. These coding adjustments may adversely affect the level
of payments from CMS to our Medicare Advantage plans.

Limitation on the federal tax deductibility of compensation earned by
individuals-Beginning in 2013, with respect to services performed during 2010
and afterward, for health insurance companies, the federal tax deductibility of
compensation will be limited under Section 162(m)(6) of the Code to $500,000 per
individual and will not contain an exception for "performance-based
compensation." This limitation has increased our effective tax rate by
approximately 60 basis points for the year ended December 31, 2013 and 200 basis
points for the year ended December 31, 2012.

Accountable Care Organizations-The Affordable Care Act established
Accountable Care Organizations, or ACOs, as a tool to improve quality and lower
costs through increased care coordination in the Medicare fee-for-service
program. CMS established the Medicare Shared Savings Program, or MSSP, to
facilitate coordination and cooperation among providers to improve the quality
of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs.
To date, we have partnered with numerous groups of healthcare providers to form
thirty-four ACOs that have been approved to participate in the MSSP. ACOs are
entities that contract with CMS to serve the Medicare fee-for-service population
with the goal of better care for individuals, improved health for populations
and lower costs. ACOs share savings with CMS to the extent that the actual costs
of serving assigned beneficiaries are below certain trended benchmarks of such
beneficiaries and certain quality performance measures are achieved. We provide
a variety of services to the ACOs, including care coordination, analytics and
reporting, technology and other administrative services to enable these
physicians and their associated healthcare providers to deliver better quality
care, improved health and lower healthcare costs for their Medicare
fee-for-service patients. As of December 31, 2013, we have incurred
inception-to-date expenses of approximately $63 million, pre-tax, related to our
ACO business, including our equity in the losses of our unconsolidated ACOs and
have recognized no revenues to date. We also expect to incur significant costs
during 2014. Under the MSSP, CMS will not make any payments to ACO's for the
. . .